Saving for Medical Expenses in Retirement With a Health Savings Account
If you are covered by a high-deductible health plan (HDHP), you may be eligible to contribute to a health savings account (HSA) – a type of account with tax advantages that makes it possible for you to pay qualified medical expenses with income-tax-free dollars. Although the account can be used to pay current medical expenses, it can also be used to tax-efficiently save for medical expenses that may be years away, such as in retirement.
HSAs offer a trio of tax advantages that make them an extremely tax-efficient way to save for your future medical expenses.
- Your contributions are either pre-tax or tax-deductible.
- Growth is tax-free. Any interest and other earnings on the assets in your HSA are tax-free.
- Withdrawals used for qualified medical expenses are tax-free. Qualified expenses include expenses such as deductibles, copays, coinsurance, lab fees, and prescription drugs. They also include Medicare premiums (but not Medigap premiums) and long-term care insurance premiums.
With an HSA, your money goes in income-tax-free, potentially grows tax-free, and comes out tax-free if it is used for qualified medical expenses.
Plus, the funds in your HSA remain in your account until you use them. The “use it or lose it” rule that generally applies to flexible spending accounts does not apply to HSAs. Any HSA funds that you do not use this year can be used in future years – even in retirement.
If you decide to use your HSA to build savings for your medical expenses in retirement, consider contributing to your HSA every year and paying your current medical bills out of pocket. By not dipping into your HSA for your current expenses, more money remains in the account where it can potentially grow tax-free for decades to come.
An HSA may also come in handy for nonmedical expenses in retirement. Money can be withdrawn from an HSA for any purpose, although you’ll need to pay income tax on amounts withdrawn that exceed your qualified medical expenses. You’ll also pay a 20% penalty if you are under the age 65. You will still need to pay income tax on your nonmedical withdrawals – just as you would on the taxable portions of withdrawals from traditional IRAs and 401(k) plans.
If you are eligible to contribute to an HSA, talk to us today about how an HSA may fit into your plans for retirement. With offices in Rutland and Williston, Vermont Copper Leaf Financial develops a customized wealth management plan designed to integrate every aspect of your financial life. Our approach is to provide clarity and calm amidst the chaos. Where there is uncertainty, we look for facts. We call our approach evidence-based investing. Call us today at 802-878-2731 to schedule a strategy session and begin building your road map to financial success.
Article published in March 2021 edition of Eye on Money. If you would like to be added to our mail list please email firstname.lastname@example.org.